Why we cannot afford to raid the child trust fund piggy bank

We asked our writers to explore an issue they feel passionate about. Child trust funds are under threat.
Zoe Williams says we should maintain the most successful savings initiative launched

Children eating a quick snack in while playing in the street in Liverpool Riverside constituency, where unemployment stands at 12%. It had the lowest turnout in the 2005 election. Photograph: Christopher Thomond Christopher Thomond/Christopher Thomond

My first reaction to the child trust fund was a bad one, based mainly, I admit, on the annoying adverts they'd play as you waited four hours for a midwife's appointment. It was on a loop with an advert about not smoking while you were pregnant. On a bad day, you could see them both 40 times, and when you came out, all you could think about was what a bad idea the child trust fund was, and how much you wanted a cigarette.

Here's the problem, as contained in the advert: this fund is worth £250, at birth, topped up with the same amount at seven years old, double that both times for poorer families. A man pirouettes about the screen, saying: "What if your child wanted to be a ballerina? Or put some money towards their first flat? This can help them realise that dream" (I paraphrase somewhat). It was infantile. Putatively addressing parents, it zoomed in on a dream that a 12-year-old girl might have for her offspring, a dream of dance that could in no way be helped by £500 gratis, from the government, whatever kind of investment yield that fetched up. Of course the intention of the fund is that parents and grandparents top up the account to a yearly maximum of £1,200, but if you have the mental age that will be transfixed by a ballerina, you'll probably be spending any excess cash in Claire's Accessories. It was patronising.

At the other end of the scale was this very pragmatic dream: the deposit towards the first house. At that time, pre-crash in 2007, the idea of an 18-year-old being able to get the money together to get onto a housing ladder, without so much parental support that they'd probably be getting an earldom at the same time, was preposterous.

Times have changed since then, but even disregarding the impact of a worldwide financial crash, my understanding of the fund was incomplete. It wasn't a means of accelerating middle-class advantage. There is good evidence that people from all social classes have increased the savings they've undertaken for their children. David White, of the Children's Mutual, gives an impassioned precis of its data: "We've got nearly 1m of these accounts. We've put that through mosaic profiling [which sorts households into affluence categories]. Of our children where the household income is £19,000 a year, 30% of the children in that category are having £19 a month saved for them. I think that's heroic. Don't anyone tell me that lower income families don't want to save for their children's future."

Focus groups undertaken by the economist Rajiv Prabhakar suggest that grandparents in poorer families are more willing to put money into a child's locked down account, since previously they would have known it would disappear into the black hole of the family finances. Julian Le Grand, the LSE professor whose brainchild this initiative was – as far back as 1989 – points out that, as a proportion of the education budget, it represents only very slightly more than 0.5%. There is no other use for the money that wouldn't be marginal, even go unnoticed, whereas, by contrast, a well-managed CTF could yield £50,000 upon the child's 18th birthday, which would be an enormous boost. Assets are the spur of a sense of belonging, of citizenship, of ambition and a lifetime's financial planning.

Le Grand's original proposal was striking in its ambition: he foresaw a far greater sum than £500 going to every child born, something between that and the life-changing $80,000 proposed by the modern liberal egalitarians Ackerman and Alstott. Le Grand says: "I rather favour the idea of funding it out of inheritance tax – that was my original proposal. You take the wealth of one generation, use it to fertilise the wealth of the next. I still would like to see that."

That's poetic, even beautiful, economics, regardless of the fact that it would still favour well-managed funds in middle-class families, and it still wouldn't be means-tested. But, as it stands, this money is taken as part of the education budget, it has no relationship with inheritance tax and I cannot shake the feeling that, in 2020, some undergraduates will arrive at university with whatever yield they got from 500 quid, while some arrive with £50,000.

That is massive financial inequality. When I was at university, rich kids distinguished themselves because they had their own stereo. They didn't have 50 grand. A university education is expected to cost a lot more in 15 years' time, and there is already evidence that students from poorer families are more alienated by the idea of the debt a degree will incur than richer ones are. Imagine how much that divide will be exacerbated when affluent students won't even have to go into debt to fund their higher education.

The positions of the major parties are counter-intuitive. Well, no, the Labour party, understandably, is committed to continuing the CTF exactly as it is, on a number of grounds: means-tested benefits backfire, they have poor takeup, they're hard to administrate.

This is the most successful savings initiative that any government has launched. Indeed, if you were to look at it not as part of education, nor as part of the child poverty promises, nor as a drive towards social levelling, but as a way to get people saving, you get a clearer sense of why economists are so in love with it. Twenty-seven billion pounds is spent on pensions tax relief, and yet only 40% of people are in a pensions scheme. A billion is spent in tax relief on Isas; only 29% of people have an Isa. Speaking of the CTF, White says: "In terms of changing people's behaviour, this is the most successful product there's ever been."

It's known in behavioural economics as the "architecture of choice" — in this case, changing the way we see savings, so that you have to opt out of asset building, rather than opting in. The figures stand this up, though of course not conclusively until we see the funds bearing fruit and being spent, wisely or unwisely, by the 18-year-olds of tomorrow. Le Grand says: "You could make a straightforward economic argument: a lot of the problems that we're having at the moment are because people don't save enough. That applies just as much to the middle class as it does to the lower classes."

It's a struggle to make saving sexy: the economists Akerlof and Shiller, in their book Animal Spirits, talk about the "miracle of compound interest", which to a layperson is almost comically oxymoronic. It just doesn't feel miraculous, does it? It feels really boring. Of course it's much less boring when it turns into actual money to build a future on.

This point is unarguable when public funds are limitless, but when they're tight, I wonder whether that's the best use of public money, fostering long-term wisdom in a cohort that shouldn't need hand-holding to that degree.

But the Children's Mutual figures suggest that, of the 25% of people who don't bank the cheque (and even though it'll be banked for them, after a year, only 3% of these go on to save into the account), 40% are affluent. My assumptions about this group of refusniks were wrong: they are not the poorest, unfamiliar with financial products. They're anybody. Now I think about it, I only banked my child's cheque one month before his first birthday.

The Conservatives want to keep the CTF, but means-test it. In classic Osborne rhetoric, they say they will stop the fund going to "the better off", but in practice, they plan to stop giving it to any household with an income over £16,000. It will be limited to those below the poverty line, and those quite assiduous households saving £19 a month, on a very tight budget, will be stuffed. The Liberal Democrats want to axe it altogether. For such a small element of the education budget, the CTF is one of the clearest differences between the parties, an island of ideological distinction in a sea of efficiency saving and other policies presented as pragmatic arithmetic. "Vote for me, I'm the best at sums."

Means-testing went right out of fashion under this Labour government, and for very good reasons. The Joseph Rowntree Foundation has shown the pitfalls of it, not just the stigma, but the complexity. The more targeted a benefit is, the more complex its administration and the worse its takeup. Employment incentives often work against poverty alleviation, but without them, there is a risk of people being trapped in poverty because they simply can't afford to make the leap from benefits to employment.

The CTF is one of the benefits that is least susceptible to these pressures: you could heap money on children born into poorer families, and it would make no contribution to the household income and therefore have no impact on tax credits or incentives to work. Of course it wouldn't offset the ills of a bad education – this can't be heralded as an alternative to a fairer education policy – but if the same amount of money were divided among far fewer people, it would make a much more significant dent in the inequalities they faced when they got to university.

One of the arguments made for the fund is that it's the envy of the world. They're discussing it in the EU, and in America. Hillary Clinton proposed it for American children but she accidentally said $5,000 instead of $500, and was forced to withdraw the policy altogether. I'm dubious about the admiration of the outsider. We often talk glowingly about Scandinavia, admiring its childcare provision, law and order, tax system, the snow-ready contingency plans. We never become any more like Scandinavia. Plus, and this takes the sheen off this envy, the answer at the moment comes back, from Europe and North America: "It's not the right time to be starting expensive new schemes."

That might be the best argument for keeping our baby bonds, however. Launched in the middle of a boom, they distil the optimism of richer times, and haven't turned out to be cripplingly expensive (£250m last year, £520m this year, when the first seven-year-olds get their top-up). If it's cheaper than the Isa tax break, and having a greater impact on the landscape of individual finance, it would be short-termist to squeeze it.

I've come full circle: three Thursdays ago, I was fully behind Nick Clegg, when he said he'd love to keep it, but we can't afford it. Two Thursdays ago, I was behind the Tories: it was a luxury, but one worth keeping for the poorest. Now, I think the Tory band of beneficiaries is too narrow. White pointed out that 57% of people don't go to university. That's many more than the number of children living in households where the income is under £16,000. The ballet industry can't employ them all. If you think of an 18-year-old spending £2,000 learning to drive, and thus becoming more employable, it is clear that even a fund that wasn't saved into to the maximum amount could be a sink or swim margin.

If any party were proposing to cut out the upper income brackets and divert that money to lower ones, then I'd support it. But altering eligibility just to bleed money out of the fund is short-sighted. I could make economists really throw their hands up with this suggestion – why not axe the tax break on Isas instead? Put that into a bumper child trust fund for the disadvantaged? Come on, only one in three of us are using it.

Child trust fund facts

• More than 4m tax-free child trust funds have been opened since 2005.

• More than £2bn is held across all child trust fund accounts.

•Children get a £250 voucher from the government to start their fund. On their seventh birthday, they get another £250. They cannot get access to the account until their 18th birthday.

• According to the Institute for Fiscal Studies, each year around 800,000 newborns receive an account, at a cost of about £500m, including the top-ups.

• Nearly one in four parents miss the 12-month deadline to invest their £250 cheque from the government. It goes into a default account.

• A few funds have seen returns of 30% or more. For example, a £250 investment made in 2005 was worth £333.64 five years later.